NetApp Inc. Earnings Call Highlights Growth, Margin Risks
NetApp Inc ((NTAP)) has held its Q3 earnings call. Read on for the main highlights of the call.
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NetApp Inc.’s latest earnings call struck an optimistic tone, with management emphasizing broad-based execution across revenue, EPS and cash flow, alongside record operating income and all-flash momentum. Executives also acknowledged headwinds from product margin pressure and surging memory costs, but framed these as manageable near-term issues rather than structural obstacles.
Revenue Growth and EPS Outperformance
NetApp delivered Q3 revenue of $1.71 billion, up 4% year over year, or 6% excluding the divested Spot business, and above the midpoint of guidance. Non-GAAP EPS climbed 11% to $2.12, beating the high end of guidance and underscoring strong operational discipline despite mixed macro and supply conditions.
Record Profitability and Strong Margins
Operating income reached a record $533 million, up 8% year over year, with operating margin improving to 31.1%, a gain of 1.1 percentage points. Non-GAAP gross margin rose about 50 basis points to 71.2%, helping drive the best quarterly EPS in the company’s history even as product-level margins compressed.
All-Flash Array Momentum
All-flash array revenue hit a record $1.0 billion, up 11% year over year and implying a $4.2 billion annual run rate, as customers leaned into NetApp’s unified and block-optimized AFA portfolio. Management highlighted strong competitive win rates and sustained interest from enterprises modernizing core storage for performance-sensitive workloads.
Keystone Storage-as-a-Service Strength
NetApp’s Keystone storage-as-a-service offering continued to scale rapidly, with revenue growing about 65% year over year in the quarter. Unbilled remaining performance obligations reached $482 million, up 38%, signaling robust multi-year demand for flexible, consumption-based storage models.
Public Cloud and Marketplace Growth Ex-Spot
Public cloud revenue came in at $174 million and appeared flat year over year, but this headline masks the impact of the Spot divestiture, which contributed roughly $25 million in the prior period. Excluding Spot, public cloud revenue grew 17%, with first-party and marketplace services up 27% and roughly half of that business coming from new customers to NetApp.
AI Product Traction and Customer Wins
AI is emerging as a key growth vector, with about 300 customers now using NetApp for AI data preparation and storage, up from roughly 200 in the prior quarter. The company’s disaggregated AI storage product AFX shipped in its first quarter with notable wins, and its AI Data Engine is slated for general availability in Q4, pointing to broadening AI use cases across industries.
Growing Deferred Revenue and RPO
Deferred revenue rose to $4.63 billion, up 12% year over year, or 9% in constant currency, reflecting increasing levels of ratable and subscription business. Total remaining performance obligations reached $5.11 billion, up 14%, giving NetApp multi-quarter visibility and a solid base of contracted future revenue.
Healthy Cash Position and Capital Return
The balance sheet remains a support for the equity story, with $3.0 billion in cash and short-term investments against $2.5 billion of gross debt, resulting in net cash of $522 million. NetApp returned $303 million to shareholders in Q3 via $200 million of share repurchases and $103 million in dividends, while reducing diluted shares outstanding by about 4% year over year.
Product Gross Margin Pressure
Beneath the strong top-line and EPS performance, product gross margin fell 4.2 percentage points sequentially to 55.3%, dragging hybrid cloud gross margin down 1.8 points to 69.6%. Management cited an unfavorable revenue mix and higher-cost market purchases as the main culprits, and flagged product margins as a near-term watch point.
Inflationary Memory Prices and Supply Dynamics
Executives described memory pricing as experiencing unprecedented inflation in both NAND and DRAM, compounding the margin impact from mix shifts. NetApp is responding with targeted price increases, supplier negotiations and portfolio flexibility, but warned that persistent memory inflation and supply volatility could continue to pressure margins and complicate demand patterns.
Open-Market Purchases and Inventory Replenishment
To satisfy stronger-than-expected demand in certain product lines, NetApp turned to open-market purchases to replenish inventory, locking in components at higher prices. These actions ensured shipment continuity but weighed on product margins in Q3, and management suggested the financial effects will take time to normalize as supply flows stabilize.
Public Cloud Mix Distortion from Spot Divestiture
The sale of Spot continues to distort public cloud revenue optics, making the segment appear flat despite double-digit underlying growth. Management emphasized that excluding Spot, public cloud momentum is solid, particularly in first-party and marketplace services, and that the divestiture should be considered when assessing year-over-year trends.
Lower-Margin Service Mix and Margin Volatility
Within services, professional services gross margin improved 100 basis points sequentially to 31.3%, but still trails the 92.5% margin in support and 85.1% in public cloud. Fluctuations in the mix between products and these varied-margin service lines are adding quarter-to-quarter gross margin volatility, even as overall profitability remains strong.
Guidance and Forward-Looking Outlook
For Q4, NetApp guided revenue to $1.87 billion plus or minus $75 million, implying about 8% growth year over year, with non-GAAP EPS of $2.21 to $2.31 and gross margin between 69.5% and 70.5%. For fiscal 2026, the company targets revenue of $6.772 billion to $6.922 billion, gross margin of 70.7% to 71.7% and EPS of $7.92 to $8.02, indicating mid-single-digit top-line growth layered on strong profitability despite ongoing macro and supply uncertainty.
NetApp’s earnings call painted the picture of a company balancing robust demand in all-flash, cloud and AI with cyclical component and mix headwinds on margins. For investors, the story is one of solid execution, growing recurring revenue visibility and healthy capital returns, offset by near-term margin pressure that management argues is temporary and manageable.
